South Africa: Millions of rands diverted from Numsa insurance company, report says

3Sixty Life, currently under conservatorship, made huge loans that have not been repaid

Millions of rands in insurance premiums paid by members of the National Union of Metalworkers of SA (NUMSA) were diverted from life insurer 3Sixty Life to support other NUMSA-owned companies between 2017 and 2019.

The Prudential Authority, a financial regulator, placed the insurer under curatorship in December 2021, after a year of operating in insolvency. This decision is being challenged by 3Sixty Life’s board of directors, including interim CEO Khandani Msibi.

During the legal battle, a report commissioned by the Prudential Authority in May 2020 by Gerdus Dixon, a partner at the audit firm Deloitte, was revealed. The report provides an alarming list of questionable financial decisions made by 3Sixty Life management in 2017, 2018 and 2019, before a massive spike in claims due to Covid left 3Sixty Life struggling to stay afloat.

3Sixty Life is 100% owned by the National Union of Metalworkers of South Africa (NUMSA) Trust, through the investment company NUMSA. The investment company NUMSA (NIC) owns the 3Sixty Global Solutions group (3Sixty group), which owns the Doves group, which owns 3Sixty Life.

Khandani Msibi has been the backbone of this operation since 2008. He is Chairman of 3Sixty Life and CEO of NIC and the 3Sixty Group. He sits on the board of almost every company owned by NUMSA.

Dixon’s report shows that not only did 3Sixty Life pay for things that had no business value to the company, including a birthday party for NUMSA General Secretary Irvin Jim, but that the insurer was also used as a source of loans for the companies of the 3Sixty Group, and supported a large part of the expenses of these companies.

3Sixty Life activity

According to Msibi’s affidavit in the curatorship challenge, 3Sixty Life’s main sources of premium income are Doves policyholders (49%) and NUMSA Financial Services (NFS, 26%). NFS markets products to NUMSA members. 3Sixty Life also derives income from the retirement funds that serve NUMSA members.

In his own affidavit, Jim explained that NFS offers two programs to NUMSA members. The mandatory scheme has over 280,000 funeral assistance policyholders who contribute R2.2 million per month, while the voluntary scheme has 29,400 policyholders who contribute an additional R11 million per month. A full income statement was not provided to the court, but these figures suggest that Doves policyholders contribute around R25 million in premium income per month, with the sum of policyholder income being around R50 million. per month, or R600 million per year.

This steady stream of premium income balanced by actuarially predictable payments (pre-Covid) meant that 3Sixty Life had immediate access to liquid assets.

Loan fever

In September 2017, 3Sixty Life loaned its parent company Doves R6 million, according to the Deloitte report. The plan was for Doves to repay by selling some of its properties, but there is no indication that this was done. This loan appears to have been added to an account because at the end of the 2017 reporting period, 3SixtyLife had R19 million in loans receivable from Doves, according to extracts from audited financial statements included in the Deloitte report.

Then, on November 30, 2018, 3Sixty Life granted a second loan to Doves, for R27.5 million.

Under the terms of the agreement, Doves was to repay the balance of this loan, which was interest-free, in monthly installments of R600,000, but, at least in July 2020, no repayment has been made.

Dixon said that no loan was subject to the credit or liquidity tests that must be carried out before a loan is made, and that there was no evidence that the terms of the loans were “fair and reasonable” for the business, contrary to the requirements of the Companies Act. In addition, these loans were extended without notifying the Prudential Authority, as required.

In 2019, Doves owed 3Sixty Life a total of R32 million in loans, according to extracts from audited financial statements included in the Deloitte report. In 2019, 3Sixty Life also lent over R7 million to other group companies, including over R4 million to parent company 3Sixty Group.

Dixon flags the loans as serious governance failures, noting that “the board of directors did not approve the Doves Group and 3Sixty Group loan transactions before they were brought forward”, and the requirements of the law on companies have not been complied with.

However, in a letter from PricewaterhouseCoopers (3Sixty Life auditors for 2018) to Dixon, it is confirmed that board members discussed the loans. Msibi and Ola Luthanga, 3Sixty Group’s CFO, are also directors of 3Sixty Life and Doves, as well as 3Sixty Group and NIC.

Strangely, in September 2018, just two months before the second loan of R27.5 million, the board of 3Sixty Life decided that Doves would provide 3Sixty Life with R7.5 million in return for an underwriting of shares. This was apparently transferred to 3Sixty Life in order to comply with legal solvency capital requirements. This transaction was flagged by 3Sixty Life’s 2021 auditors as a reportable irregularity, as it was an unapproved share capital reduction, in violation of insurance law.

In November 2021, 3Sixty Life retroactively notified the Prudential Authority of this maneuver.

Payments to other companies

In total, 3SixtyLife paid out R137 million in 2019 to group companies, almost half of its total operating expenses. In 2018, this figure was R110 million.

Many of these expenses were incurred without an agreement being reached. In 2017, Dixon identified at least R10m of expenses for group companies made without an agreement in place. In 2018, this amount increased to R19.3 million. Dixon confirmed that the trend continued in 2019, where such expenditures included R2 million to NFS for “petrol expenses” and R2.2 million to Sechaba Medical Services.

Commission payments made without an agreement in place were subject to particular scrutiny.

In 2019, Doves received R65.6 million in commissions and R8.9 million in brokerage fees. In 2018, the commission to Doves was R60 million and no brokerage fees were paid to Doves. In 2019, these alone accounted for 25% of total operating expenses.

Dixon found that these commission payments from 3Sixty Life to Doves were made without any written agreement in place, and therefore no details of how the commission was calculated. Dixon was informed that “the commission was not calculated as a percentage of bonuses, but rather as a reimbursement of certain salaries and other costs incurred by the Doves group”.

This lack of agreement is explicitly prohibited by the law on long-term insurance and the law on financial advice and intermediary services.

curatorship

Before being placed under curatorship at the request of the Prudence Authority, 3Sixty Life operated for more than a year in violation of the legal requirements in terms of solvency capital and for almost a year in violation of the requirements of minimum capital. It also has not submitted audited financial statements since December 2019.

At the heart of the Prudential Authority’s request for guardianship was the concern that policyholders must see their policies honored and that the regulator “no longer had confidence” in the fact that the management of 3Sixty Life could redress its financial situation without outside help. The Prudential Authority had ample evidence of statutory non-compliance at 3Sixty Life, thanks to Dixon’s report.

According to the response affidavit submitted by the Prudential Authority in response to Msibi and Jim, none of the recommendations of Dixon’s report had been implemented, after receiving the report in February 2021. In this affidavit, the Authority Prudential says regulator no longer believes 3Sixty Life directors are “fit and proper”.

At the heart of Msibi’s attempt to remove conservatorship is the claim that Covid was the underlying cause of the insolvency. But Dixon’s report shows a company struggling to govern itself according to law, long before the world changed in March 2020.

Doves had not responded to questions from GroundUp at the time of publication. Msibi also did not respond to emails we sent him.

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